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Half a Dozen States Delay Tax Refunds

Procrastination is no longer just for the taxpayers who wait until the last moment to file their tax returns. Thanks to the economic downturn, at least a half-dozen cash-poor states are now delaying their tax refund checks.

Hawaii initially planned to delay all tax refunds until July, when its fiscal year begins, but decided two weeks ago that its finances were healthy enough to begin sending checks to people whose tax returns were processed back in January. New York briefly postponed sending out half a billion dollars worth of refunds until its new fiscal year began in April. Rhode Island extended its tax filing deadline until May 11 to help taxpayers who were still reeling from severe floods; now the state is delaying refunds to make sure it has enough money left to pay debts coming due in June.

“We’re sorry for the inconvenience. We understand that people are relying on the money for credit card bills, etc., etc., but we’ll get them out as fast as we can,” said Paul L. Dion, the chief of Rhode Island’s Office of Revenue Analysis, explaining that 34,423 refund checks were being held up as the state ensures that it has enough cash on hand to pay its debts on time. “For the record, mine is on hold as well.”

Some states lack the staff to process returns on time. Budget cuts left Iowa’s Department of Revenue without the money to hire the 50 temporary workers it usually adds around tax time. So some refund checks were slowed while nearly everyone in the department — from auditors and revenue agents to top agency officials — was directed to pitch in by opening up envelopes and processing tax returns.

“It’s been a learning experience,” said Stuart Vos, the department’s revenue operations administrator, who has ripped open some envelopes himself and said the experience had spurred state tax officials to consider changing the state’s tax forms next year to make them easier to process. Mr. Vos said the state’s delays eased after the department got permission to hire 17 temporary workers last month.

It is yet another change brought about by the longest recession since the Great Depression. Many state governments are as overextended as their residents, and find themselves balancing and rebalancing their checkbooks each week to make sure they have enough money to pay their bills. Of course, holding on to the money that many taxpayers count on is usually a last resort: several states that were greeted with angry outcries when they delayed sending out refund checks last year, including Alabama, California and Georgia, made sure to pay out their refunds faster this year.

Last year, after Missouri’s decision to delay its refund checks was greeted with anger, the state tapped into some of its stimulus money to help speed the process. This year, officials said, the refunds are being paid faster, without the use of stimulus money.

Scott D. Pattison, the executive director of the National Association of State Budget Officers, said that it was “exceptionally unusual” for so many states to delay refunds, as they have throughout the current economic downturn.

“I think it’s just an indicator of how bad things have been,” Mr. Pattison said in an interview. “It’s politically, obviously, a problem. Also, I think from a policy standpoint, it’s a little hard to justify — this is the taxpayers’ overpayment that is due them.”

Many states have a powerful incentive not to keep the checks out of the mail for too long: laws requiring them to pay interest on refunds delayed beyond 60, 90 or 120 days. In several states, lawmakers are seeking to speed payments by shortening the period before interest kicks in.

Photo

Eric McDaniel entered tax data at state offices in Missouri, which is getting checks out faster this year after falling behind in 2009.Credit
Julie Smith/Associated Press

But steep interest costs did not prevent Georgia from long delays last year, when its Revenue Department lost nearly 18 percent of its staff to budget cuts and found itself still paying refunds in August to taxpayers who had filed their returns by the April 15 deadline. The delay was a costly one: Georgia wound up paying roughly $2.1 million in interest to taxpayers whose refund checks were sent too late.

Over all, states refunded 2.9 percent less money this April than they did last April, according to an analysis by the Nelson A. Rockefeller Institute of Government of 34 states that have reported their tax refund data so far. But officials there cautioned that it was difficult to say whether the decline was because of delayed refunds or whether the smaller refunds were the result of people earning less money, or of states raising their taxes during the downturn.

Verenda Smith, a spokeswoman for the Federation of Tax Administrators, an association of tax agencies, said the vast majority of taxpayers were getting their refunds on time this year, and added that many of those whose payments were being delayed probably would not even notice a difference of only a few weeks. But Ms. Smith said she hoped the troubles would prompt more taxpayers to file earlier; file electronically, which allows for much quicker processing time; and change their withholding status with their employers so they would not overpay so much. “You really shouldn’t give it to your state government as a no-interest loan, and then have to cool your heels while you wait to get it back,” she said.

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Still, she noted, the subject of tax refunds is often fraught. “It generates emotions that come from depths that are hard to imagine,” she said.

Chris Campbell, 29, is still waiting for the $1,600 refund check he is owed by the State of Rhode Island. He wants to put the money toward repairs in his basement, which was damaged by the recent floods. Mr. Campbell, who lives in Massachusetts but pays Rhode Island income taxes because he works there as an accountant, said he has had a long wait for his refund: after the state claimed that it had no record of the return he filed in February, he filed another in April.

But still, nothing has come.

“It’s been a painful process,” said Mr. Campbell, who added that the frustrating delay had prompted him to change his withholding amounts so that he will not have to wait for a refund next year.

Tim Healey, 29, a father of two from Riverside, R.I., filed his taxes in March, and got his federal refund on April 2. But he is still waiting for the $1,019 refund he is owed by the State of Rhode Island. Asked if he had plans for the money, he said: “It’s already spent. I owe the day care money.”

State officials said that the refunds would continue to be paid on a first-in, first-out basis, and that many would probably be paid out in mid-June when many business taxes are paid.

Many state revenue departments now have features on their Web sites allowing taxpayers to check the status of their returns. North Carolina keeps a running tally of all its refunds on its Web site, which notes that “the state continues to feel the effects of the slow economy, and the department is managing the distribution of refunds as a result.”

The revenue secretary, Kenneth R. Lay, said the state was keeping close track of how much it owes each week for payroll, Medicaid costs and other obligations before deciding how many refunds to send out.

“It’s much like when you pay the bills at the end of the month,” Mr. Lay said.

A version of this article appears in print on June 2, 2010, on Page A3 of the New York edition with the headline: As States’ Bills Pile Up, Tax Refunds Are Delayed. Order Reprints|Today's Paper|Subscribe